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Tax Tips for Seniors
The tax code is very long and confusing, but there are also options and opportunities for taxpayers. The tax code changes every year, and has since 1914. The current tax code is over 50,000 pages long. All attempts to reduce the confusing code have failed—even the Tax Reduction Act couldn’t simplify it.
If you aren’t a tax guru, you really should contact a Certified Financial Planner (CFP) who is also a Registered Investment Adviser. A CFP can access your financial situation to help you find the best tax options for you. There are a ton of opportunities to help you reduce your taxes, but I will provide a few for you.
Municipal Bond Interest: Check to see if your municipal bond interest is causing your social security check to be taxed at a higher rate. If the government rules that the interest earned comes from private activity, it can mess with your Social Security taxes.
Reduced Tax Rates: Reduced tax rates on capital gains and dividends have been extended until 2010 (they were originally set to expire in 2008). The current maximum rate is 15%.
Net Unrealized Appreciation: If you own company stock in a 401k plan that qualifies as Net Unrealized Appreciation (NUA), the stock might be eligible to be removed from the 401k at a 15% tax rate instead of the ordinary rate. You should call your company’s personnel department to see if the stocks qualify for this.
IRA to Roth IRA: You should consider converting your regular IRA to a Roth IRA if you have money outside of your IRAs to pay the tax bill. In 2010, and only in 2010, you can spread the taxable income evenly between 2011 and 2012. This might not save you money, but will let you pass your IRA to your children tax free.
The AARP Tax-Aide is available for seniors, providing free tax preparation assistance. The Tax-Aide will help anyone with low and middle incomes, but people age 60 and older are given special tax attention. You don’t have to be retired or an AARP member to use these services.
Make sure you have someone you can trust to help you make financial decisions. There are a lot of scams out there, so it is important to only work with certified and registered financial planners. If anything seems unclear or suspicious to you, don’t be afraid to ask questions.
Your income changes after you retire, so the way you do your taxes will change as well. If you find yourself feeling confused about all of the different tax codes and rules, know you aren’t alone: even Albert Einstein couldn’t figure them out.